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I Savings Bonds


mavmoses07
Posts: 2
Topic starter
(@mavmoses07)
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Joined: 2 months ago

Background: I'm approaching FI, and I've started to slowly increase the bond portion of my portfolio (similar to a bond tent), currently at 95% stocks, 5% bonds. Currently I only hold bonds in my 401k (Vanguard Total Bond Market Index Fund, VBTLX). However, it seems that interest rates will go up soon and as a result the principal on VBTLX will fall. Given this and the low interest rates, the total returns for VBLTX will be near 0, maybe negative. So I've started to explore other options. 

Recently I heard about I Savings Bonds, which have an interest rate tied to inflation. The current interest rate is 3.54%, and I've read that the rate starting next month will be 7.12%. As I understand it, if I buy this month I could lock in a rate of 3.54% for the next 6 months and then a rate of 7.12% for the following 6 months. Guaranteeing me an average rate of 5.33% for the next year. This seems like a much better option than VBTLX.

So my plan is to sell VBTLX and buy I Savings Bonds while the interest rates for I Savings Bonds are this high (I would be rebalancing both my taxable and 401k to keep my 95/5 asset allocation and incur little tax consequence). Does this seem reasonable? Doesn't it seem likely that VBTLX returns in the near future will be near 0 if not negative? The downside of I Savings Bonds is that I have to hold them at least a year (not an issue for me), and if I sell them before the 5 year mark I'll be penalized the last 3 months of interest. After 5 years there is no penalty. Thoughts? Thanks in advance!

5 Replies
figuy1
Posts: 42
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Joined: 10 months ago

That seems like a pretty reasonable plan and something that I would probably do, one thing to note is the annual limit on buying I-bonds is fairly low ($10k/person/year with some workarounds to put more in).  The only thing you miss out on is the negative historical correlation of bonds to stocks that some prefer to reduce sequence of return risk.  If we have anything like a 70's style stagflation the i-bonds would be preferable to holding VBTLX.

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earlyretirementnow.com
Posts: 250
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Joined: 6 years ago

I like I Bonds, too, but since I can only buy relatively small amounts it's not worth the effort. Even with the workaround, I wouldn't see any meaningful change in asset allocation.

But if you use the last 2-3 years to build up a bit of a cushion for your retirement, go ahead. That seems like a good idea.

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figuy1
Posts: 42
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I wonder if treasury bonds will take a hit in the next 6+ months, while these high I-bond rates persist.  I know you can only move small amounts to I-bonds but I've heard lots of people talk about making this move with their bond holdings.

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1 Reply
mavmoses07
(@mavmoses07)
Joined: 2 months ago

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Posts: 2

@figuy1 I tend to think there won't be a significant amount of people switching from treasury bonds to ibonds, I don't think the general population pays that much attention to these rates. To me as long as interest rates are so low it just doesn't make sense to invest in treasury bonds, even if there is a bit of negative correlation with stocks. If interest rates increase bond principals should decrease, resulting in a negative return. That's why I think you're better off just sticking with cash or I bonds. If stocks do take a dive I don't know that treasury bonds will necessarily go up that much because interest rates can't drop that much more. 

Even though you're limited to $10k per person per year for I Bonds, there are also bonds like TIPS, (Vanguard VIPSX). I'm not as familiar with how these work, but it would seem as long as inflation (and therefore dividends) are high they'd be a good investment. Then when inflation, and dividends, decrease the principal on TIPS should increase. So TIPS might also be a good investment while interest rates are low and inflation is much higher. 

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nobatmanjokes
Posts: 91
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Joined: 1 year ago

So long as you’re not realizing a big capital gain in the taxable account to do this rebalance it seems like it’s reasonable. The I bonds break even compared to cash or even VBTLX is likely less than the lockup period right now, unless rates go massively negative. The risk adjusted return is probably therefore much higher.

Compare I bonds at 0% to TIPS which are negative at all durations and they’re way better. Plus they’re tax deferred gains unlike TIPS which either have phantom gains or take up IRA space. To me the main drawback is the purchase amount limits but I’m early enough that I can accumulate a meaningful amount by my FI date. 

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